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How to pay down your mortgage early
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Finance Canada
Thankfully mortgage delinquencies aren't a major concern in Canada, but you can still do yourself a favour and save thousands of dollars in interest payments by eliminating your mortgage debt ahead of schedule.
Owning a home is one of life's best investments, says David Stafford, managing director, Real Estate Secured Lending at Scotiabank in Toronto, pointing to the fact that owning a house historically has proven to be an appreciating asset over time.
“Most Canadians are not struggling with paying off their mortgage. We’re not seeing huge problems with delinquency. In fact, since 2009 any delinquency problems we have had has been trending downward,” he says. “Wherever you live it’s going to cost you something to live there . . . the same power that compounding rates have in investments over time and the ability to build investments, those compounding rates cost you money over a long period of time on a mortgage.”
Thus if you can manage to knock the last five to 10 years off of your 30-year mortgage, you can save tens of thousands of dollars.
"We've done the math. We know that while rates are important, reducing the length of the mortgage can really pay off,” he says. “This is a great time to accelerate mortgage repayments and build equity in your home. Use the current market environment to your advantage.”
For example, switching to a bi-weekly payment structure on a $200,000 mortgage with a four per cent interest rate can translate into paying the mortgage off about four years sooner with an overall savings of over $23,000 in interest. Increasing the payment on that mortgage by $10 -- or 2 per cent -- each year, takes another six years off and increases the interest savings to almost $48,000.
Use the interest rate environment to your advantage
The cost of the mortgage for any individual is a combination of the interest rate, how much one borrows and the length of time you borrow funds.
“There’s a huge opportunity right now to use the interest rate market that we’re in to accelerate mortgage repayment. Small changes that you make now can make huge differences on the life of the mortgage,” he explains. “Interest rates are at record lows so all of the rates in the market are pretty good right now. How much you borrow is dictated by how much you have and how much house prices are so people don’t necessarily have a lot of control over that.”
But in Canada’s current interest rate environment, people can make significant in-roads in shortening the length of a mortgage.
“Small changes, like a few hundred dollars a year or $500 a year of extra payment, or going bi-weekly or weekly instead of monthly on your payment; making small increases to your payment or if you’re coming out of a mortgage from a few years ago and looking at a renewal, keep your payments the same,” he advises. “It’ll have a huge impact on reducing the length of your mortgage and really that’s where the savings for Canadians with mortgages today lie.”
Meanwhile, it appears a new mortgage war is afoot. Canada’s fourth-largest bank, BMO, has lowered the rate on a five-year mortgage to 2.99 per cent. It also cut the rate on 10-year mortgages to just 3.99 per cent. Both offers apply to a 25-year amortization.
Be prepared for interest rate increases
When asked if it’s a wise strategy at present to commit to a fixed-term mortgage given the state of the market, Stafford says though he can’t predict what will unfold in future days, the difference between fixed and variable rates currently is not very high.
“We are in a historical low in terms of fixed-rate levels today so it might not be a bad idea to take advantage of that,” he remarks. “Rates may be higher in the future, or they may not, but there really isn’t much room for them to go lower.”
A year ago, he continues, fixed-rates were in the four per cent range and variable rates at about two and a half or two and a quarter per cent range.
“Today you’re looking at variable rates in the three per cent range and fixed-rates in the low to mid-threes,” he adds. “So the extra cost of locking in for five years at this level is not very high. I don’t think you’re taking any chances by picking fixed-rates right now.”
Other Scotiabank tips for Canadians who wish to pay off their mortgages faster include:
Round up your mortgage payments to the nearest $50 or $100
Make one small lump sum payment each year.
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